Let's use oil as an example of something that takes very little labor to make. It doesn't matter if it is made in another country for cheap, or comes out of the ground for free, the effect is the same. Suppose all the wells are owned by one person. Everyone else flips hamburgers. If you assume he can make oil basically for free, oil will be very cheap relative to hamburgers. Anybody who can make a hamburger, will be able to get all the oil he wants. Any time a good is abundant, it will make other goods, such as labor, relatively more scarce. If somebody starts selling cellphones for $1 on ebay, the price of old stamps does not go down.There is an exception to this. Suppose it is the job of the Fed to prop up the price of oil, or cellphones, or whatever, in the event it suddenly becomes easy to make, or to get from another country. It is only if they print money, and don't give it to people who labor, or don't use it to buy old stamps, that the natural advantages to scarcity will be interrupted. Normally the price of labor in units of oil, or the price of old stamps in units of cellphones, would go way up. But not if the Fed is printing money, and giving it to some third person other than the labor or stamp sellers, to buy oil and cellphones.What if you were the only guy sitting in a bar, and you talked some hooker down in price so that she was willing to go home with you for $10. But the moment before she does - the second you get up and begin to walk out at a price of $10 - the Fed sees this on the camera from the back room, and sends in a bunch of boys with hundred dollar bills to prop up the price of hookers. The boys aren't coming from overseas. They are coming from the Fed in the back room.When the Fed prints money to achieve price stability in oil (and if the CPI is "chain weighted" so that the price of oil matters more than the price of labor as the supply of oil rises), the oil doesn't get any cheaper relative to labor. You can't use your old stamps to trade for cellphones, because some third party has entered the market and bought all the cellphones with cash. The people with labor and old stamps don't get oil and cellphones, rather the people who get the cash get the oil and the labor and the cellphones and the old stamps.Put simply, the Fed is handing money to people who don't demand labor. Whereas if the Fed simply let prices of automated or imported goods drop in a fast deflationary washout, labor would find themselves standing on top of the pile of wreckage. And people who work would quickly start borrowing money to begin inflating the price of oil again, from the new, lower level. Nobody is in a better position to put the squeeze - or not - on makers of automated goods, or cheap imports, than the Fed. If you are a laborer, it is the Fed who has stepped in and ruined your negotiating position. It is the Fed who has snatched victory from the jaws of defeat for makers of automated goods and cheap exporters, and snatched victory from laborers.
Last edited by farmer
on January 18th, 2014, 11:00 pm, edited 1 time in total.